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According to Ricardo Reis, an economist at the London School of Economics, the Fed is likely to raise benchmark interest rates to above 5.5%. This is in contrast with the average market view that now expects the Fed to stop raising rates at 5%.

We believe that the deciding factor in whether interest rates will go much higher than 5.5% is the job market. For now, payrolls have not kept up with inflation, and as long as the job market remains strong, the Fed has little maneuvering room. The other factor to look at is productivity. Provided productivity can keep up with wage raises, the Fed won’t be required to take too much action, and inflation will come down gradually over time.

On the contrary, if wages spiral out on the back of a tight unemployment market, then we would expect more and stronger actions from the Fed. And at this point, the Fed may even overreact and consequently rates would raise well beyond 5.5%.

To summarize, a slightly higher unemployment rate would probably be the most sympathetic to the idea to pave the way to a return to low inflation.

Now, according to BNY Mellon, bonds now offer their most attractive yields in more than ten years and JPMorgan is bearish equities for H1H23 - S&P 500 to re-test the 2022 lows as the Fed overtightens into weaker fundamentals. Yet, at the same time, they expect the FED to pivot earlier than expected. This is truly a catch 22 for investors and analysts, there is hardly any input from any brave researcher and analyst to consider increasing the duration in bonds in the coming months. Probably the story will come once it is too late!